Saturday, March 29, 2014

"Land of the brave" no more?

If you can’t try something new in 10th grade, when can you? If you can’t afford to risk anything less than perfection at the age of 15, then for heaven’s sake, when is going to be the right time?...

Now is when this kid should be learning to dream big dreams and dare greatly. Now is when she should be making mistakes and figuring out how to recover from them. Instead, we’re telling one of our best and brightest to focus all her talent on coloring within the lines...

Now, more than ever, we view a college degree as an absolute prerequisite for a minimally decent life. And if we’re in the upper middle class, it has to be a degree from an elite school...To keep their kids from falling off the side, [parents are] pushing them harder than ever.

Is American risk-taking really decreasing? Well, it's hard to say. Despite the popularity of Silicon Valley startups in the news, the rate of new business formation has fallen steadily since the 80s. Americans are less likely to try to switch jobs than before. Discount rates implied by stock prices haven't fallen much, but I'm not sure that tells us a lot.

But anyway, let's assume it's true, and that America has on the whole become a more timid nation. Why might this be happening?

1. No social safety net. America has less of a social safety net than most rich European and Anglophone countries. Especially since welfare reform in 1996, economic failure has dire consequences. If your business or risky career path falls through, you'll have no health insurance (well, at least til Obamacare kicks in), and you could even find yourself on the street. Jacob Hacker calls this the Great Risk Shift.

2. Income inequality + income stagnation + social preferences. The big runup in inequality since 2000 has mostly been about the top 0.1%. But in the 1980s - when the rate of new business formation started to fall - there was a much broader increase in inequality. The middle class spread out, and that raises the penalty of failure. If you don't break into that $100k-and-up income bracket, you'll be stuck in $30k service-sector-land. Add to that the fact that incomes for the lower part of the distribution have flatlined since 1980, while incomes for the top brackets have soared; a career failure means, more than ever, that you'll be much poorer than your peers.

3. Labor market segmentation. In America, if you're unemployed for longer than six months, you have a much worse chance of getting a job Also, the college wage premium has increased - if you don't go to a decent school, good luck getting a decent job. This is a weaker version of what has happened in Japan. It seems like both college and the duration of unemployment have become important signaling devices. Fall off the "success" wagon, and good luck getting back on.

These three explanations don't involve any increase in Americans' risk aversion; they simply mean that risks have increased. But what if risk aversion is increasing too? I can think of a couple reasons for this:

4. High-Investment Parenting. America's upper-middle-class has largely adopted a parenting strategy that Richard Reeves calls "High-Investment Parenting". With relatively low fertility rates among the upper middle class, this kind of parenting strategy makes sense. But it could mean that parents are going out of their way to discourage their precious kids to take risks.

5. The Internet. I noticed something odd recently. Japanese people are traveling to America less, and when you ask them why, they often cite violence as the reason, even though violence in America has declined dramatically in the last two decades. But thanks to the internet, there's a lot more information available about the violence that does exist, and by the availability heuristic, this will tend to make people more worried about it. In the same way, Americans may be more acutely aware of the real consequences of failure, thanks to the internet, and this may be scaring them.

So the question is, what do we do to encourage Americans to take more risks? Well, the internet is here to stay, and High-Investment Parenting seems like a very good thing overall. So the best way to boost risk-taking seems to be to decrease the downside risks of failure - by establishing a social safety net (including universal health care), and by doing whatever we can to fight labor market segmentation (I'll admit I'm not sure how to do that, but there must be ways). It's a lot easier to be the "land of the brave" when you've got a whole army behind you.

42 comments:

People are talking about our our college education system. I'll just say, I found out from reading "The Second Machine Age" about the incredibly important book "Academically Adrift" by a NYU and UVA sociologists. Our undergraduate education has gotten far worse over the last generation. Mostly it's because faculty incentives have gotten so bad. The faculty has massive incentives to publish or perish, so you get grade hyperinflation and faculty that push students less and less to avoid time consuming problems with students. It's a scary read, but this is a massive externalities, smart for one, dumb for all, public problem, you really need some strong national standards and regulation.

Duhhh. Libertarians are so horribly infuriating. Yeah, let's just make life incredibly risky, and then marvel that people aren't striving for big risky innovative things nearly as much as they used to now that it risks their children being on the street!! WTH! Of course you're going to have way less risk taking, way less innovating, way less going for the home run, trying for that masters or PhD, or new invention when you make failure so devastating for you and your children. Who could have guessed??!!

This is a good post on an important topic, but I'd like to challenge your basic premise that more risk-taking is inherently good. Some risks are better for people and for society than others. Not saving for retirement is risky, but that doesn't make it inherently good. And if someone who has a lot of potential doing high-skill work that is likely to pay well decides to go into acting instead, when he/she isn't even all that good at it, and ends up making $20,000 for the rest of his/her life doing cameos and working as a waiter/waitress, then that's a loss both for the individual and for society. Society is poorer because someone who could have been really productive is not, and the aspiring actor/actress is a lot worse off than he/she could have been otherwise. That said, if only rich people make it in acting, then that's also a loss for society because you end up with worse movies and TV shows when there's less diversity. But that outcome is possible anyway, considering all the structural problems involved, which arguably should be addressed first.

So I think we should try to encourage more "good" risks (which are likely to benefit both the person taking the risk and society) but should discourage, if possible, "bad" risks (which are likely to hurt people). Markets do a lot of that on their own, and a stronger safety net would definitely help (though we should have a stronger safety net anyway, just to be a more humane society). But not all risks are good, and I think it's important to recognize that when people avoid risks that are likely to do more harm than good, then that often is a net gain for both them and for society.

A former boss of mine once worked as a loan officer and was critiqued by his boss for having too low a default rate. A certain percentage were always assumed to be destined for default, but which ones could not be predicted.

The point here, which you miss, is fundamental to risk - we don't know which are good or bad until the cards are down.

True, but some risks are a better bet than others. With one risk, your expected payoff may be moderately high and the variance may be quite low, but with some other risk, the expected payoff can be really low and the variance can be high. I'm not sure many people would choose the second risk if they viewed it quite that way, but a lot of people choose it anyway since they think that the high payoff that has a very small probability is actually very likely. And a lot of people end up suffering as a result.

Note that people say entrepreneurship has been declining since the 1980s because the dataset used for this stuff--the BDS--only goes back that far. It may have been going on before the 1980s as well. I seem to recall a chart from a different dataset that only covered manufacturing showing a longer trend; I'll see if I can find it.

Benjamin - I expect the laws differ from jurisdiction to jurisdiction but bankruptcy law is part of my practice as a lawyer. In my experience there are important liabilities that an LLC does not avoid.

"Truthfully, bankruptcy laws aren't really the issue when it is relatively easy to start up an LLC and walk away if it fails."

I'm making a guess here, but I'll wager that if you form an LLC with few or no assets, nobody is going to loan *it* money. They'll require *you* to sign for those loans, so that they have somebody to go after who actually has assets.

I am not sure it is risk taking which has declined as much as the opportunity of success has shriveled for small, minimally capitalized ventures. Looking at the cash hoards of corporations and the growing wealth disparity, risk taking has become less risky for the wealthy and more risky for the majority of would be entrepreneurs. One must be very careful about embracing anything McArdle says or writes. This puff piece is pure upper-crust opinion. Most 15 year-old folks I know are looking for a boy/girlfriend and "dreaming" about receiving a drivers license. As parents, most of us discourage risk taking on the part of our children. We found out the geniuses of Wall Street are poor risk assessors, why would our young folks be any better?

A safe rule of thumb is that anything worthwhile you find in a McArdle piece, you brought there yourself. It seems to me that the risks are (as Noah notes) much higher, the consequences of failure (as Noah notes) also much more severe, and furthermore, the perception of risk (as Noah notes in passing in his comment on the Japanese Tourist Phenomena) has skyrocketed, thanks largely to media pounding on the Message Of Fear. That these three interlocking phenomena are largely due to the efforts of McArdle's paymasters, and with her enthusiastic assistance, just adds that lovely frosting on the usual "Libertarian" cake.

Mundane hypothesis:We are seeing a return to longterm baseline. The expansion of opportunities related to the growth of the internet and associated technologies created many options in the 1980's through early 2000's. The low hanging fruit have been plucked, and we have fewer attempting to achieve as things get harder. People have not changed. Politics have not changed; same b.s. in shinier wrappers.When we get the next wave of technological breakthrough, there will be a reawakening of entrepreneurs.

If a robust social safety net results in greater risk-taking, shouldn't Europe have the greatest amount of entrepreneurship and risk-taking? And yet just last weekend the NYT ran an article entitled "Au revoir, entrepreneurs" which appears to suggest the opposite.

"The real problem is unemployment right now - people will start taking up much more risks if they knew they would find a job if they failed. "

Noah, this is something which you mentioned yourself and still didn't spot. The US is now a place where losing your job can trash you forever. As you mentioned, if you are unemployed for longer than six months, you are screwed, blued and tattooed. Now, how long does it take to find a white-collar job, after losing one? I'll wager that it generally takes six months or more (I've seen a comment by a recruiter printed who estimated that the death curve was actually now a matter of a few weeks).

The size of the safety net that we, as a society, provide has to depend on what people are going out on a limb for. The more safety net we provide for stupid endeavors...the less safety net we'll have for brilliant endeavors. You know what I mean...right? It's your favorite concept...opportunity cost.

The market works because we can all vouch/vet/validate what other people are doing with society's limited resources. Your blog has nearly 700 followers...mine has 10. Does this have any significance or meaning? Sure, far more people vouch for how you are using society's limited resources. Clearly you're going out on a limb for something that more people value. This means that far more resources should be allocated to your efforts.

Where it gets funny/strange...is that my efforts have to do with pointing out the value of crowd vouching...while your efforts are the complete opposite. You point out the value of government vouching. More government vouching means less crowd vouching. LOL. The crowd vouches for your efforts to malign their value judgements. The crowd values your efforts to point out how their values are wrong. Sheesh. Sigh.

Of course your crowd is just a subset of the crowd. A subset of the crowd who obviously fail to understand how and why markets work. It's an unfortunately large subset though.

You should put your crowd to work. Create a blog entry where you propose starting an online forum that works exactly like our public sector does. If you get enough positive responses...then start a crowdfunding campaign to finance your top down forum. It's a brilliant idea right? As it stands...every forum is a market. I'm sure it's just a coincidence.

"Discount rates implied by stock prices haven't fallen much, but I'm not sure that tells us a lot."

If risk-taking has decreased, then discount rates should rise. I think the cost of equity has probably have fallen over the last say fifty years, but I agree that it probably doesn't mean much about risk taking in the sense you mean it.

Is there any real evidence risk taking is declining? The internet and housing bubbles were not examples of excessive risk taking? There was a lot of risk taking *before* the social safety net. What about people who go into dangerous lines of work, like selling drugs? Seems like there is a lot of risk taking entering illegal businesses in the inner city.

Or, maybe productivity means people have more leisure time to take non-economic risks. Membership in the US parachute association has grown 10x since the early 60s while the population has only doubled. Over the last decade membership resumed climbing. And, rock climbing popularity is up too. Then there is mountain biking, road biking (a contact sport in the city), and the shooting sports (the NSSF recently reported that high school trap shooting is up. In Minnesota for example it has gone from 30 kids in 2008 to 6300 last year).

As a society we are "taking risks" like repealing drug laws and decriminalizing drugs.

Overall, I think you and McArdle are seeing what you want to see here. It's hard to rationalize the "decline" in risk-raking with the housing bubble. I could just as easily make a case that taking economic risks like changing jobs and starting a business are only a very limited dimension. Ample leisure time means people are more willing to take non-economic risks.

"Starting a business" has become more complex since the 80s. In the dot-com era, lots of people quit to start a dot-com. Or, they threw their retirement savings into Yahoo or AOL.

If there is less economic risk taking, and its not clear to me that there is, I would look to low inflation or aggregate demand first, not any of those other things. Inflation is a socioeconomic sign of scarcity. It signals expansion - get into the labor force and build more stuff. Every new project, whether its a new factory or new business, is risky. Investment is pro-cyclical. But before we go there how about first a coherent objective measure of risk taking.

There has been a general transfer of risk from employers and other institutions to the working individual. We don't have defined benefit pensions anymore. (The goalposts have been moved.) We don't have a living minimum wage anymore. (The floor has been lowered.) We don't have free public higher education anymore. (The ante is higher.) There is probably just as much risk taking as ever, its just less of it involves striking out in a new business.

There's also the problem of business structure. Income associated with sole proprietorships has been shrinking for decades. This is partly about economies of scale. Mom and pop shops get replaced by franchises. Franchises get replaced by big box stores. Big box stores get replaced by distribution systems like Amazon. Its enhanced by modern command and control technologies. In the old days, a chef would be hard pressed to run two restaurants. Now he or she can run dozens and track things on a day by day basis. That's so many fewer slots for risk takers in the business ecology.

Part of the result is that return on investment has fallen in general. 4% savings accounts vanished with bell bottom jeans, and they vanished for a reason. The risk premium in general has collapsed. There's a reason the market goes up during times of economic collapse. When there is no place to invest by buying capital goods or hiring workers, you put money into financial instruments. The stock market boom associated with the early 1990s recession was not an anomaly, but part of the new pattern. If the titans of finance can't get a return from building new businesses, perhaps it is not surprising that the little guy figures he doesn't have much chance.

Starting a business is not the only risk-taking -- bike riding w/o a helmet is also "more risky" than bike riding using a helmet. But less fun. And, now in some areas, it is no longer legal. Wherever "risky behavior" becomes illegal, there will be less of it.

And in starting a business, more business regulations and laws means it is more likely to be illegal.

Yet the growth in rock climbing, as well as rock climber deaths and injuries, seems to indicate an increase in risk taking.

Similarly, having sex w/o properly using birth-control -- most single mothers didn't want to become pregnant when they did, so they were engaging in risky behavior.Because there has already been a BIG INCREASE in the social safety net. But the safety net for the poor is not much of a calculation for workers contemplating starting a business.

This post seemed to be both about risk taking, not well discussing lots of risks, and new business formation, again not being clear about whether new business starts are a measure of Americans becoming timid or not.

"But anyway, let's assume it's true, and that America has on the whole become a more timid nation. Why might this be happening?"

All of #1, #2, and #3 seem to be about business starts, not risky behavior, and none mention the difficulty of creating a new successful business in any slow growth city. And #1, in particular, is false -- most failed businesses owners have more access to a gov't safety net today than in the last 100 or 50 or even 20 years. You fail to define "economic failure", but the level of consumption by those on welfare today seems higher than in 1995 before welfare reform. Comparing actual consumption of those at the bottom 10% income level today vs 10, 20, 30 years might well be good -- I recall seeing blog posts indicating higher color TV, car, and refrigerator ownership. Maybe there is more published. Of course, actually looking up the facts might contradict your comfy but wrong Dem assumptions.

Finally, cities that are growing make it easy to create a new restaurant, or any business, by attracting new customers from the new comers to the city. In a stable population city a new restaurant or business needs to change the already established behavior of current residents, which is much harder / less likely to be successful.

Less pop growth means more difficulty in starting a business. If business starts are a proxy for risky behavior, stable populations will look more risk averse than growing populations. So it's not a good proxy.

Sort of related to this, Incidental Economist is currently running a series of posts about Job Lock (not changing jobs because of healthcare benefits) which I've always sort of assumed was pretty related to the difficulty in being entrepreneurial and is sort of the positive version of Noah's point 1.

Link to introductory post (with a ToC for the rest of the posts): http://theincidentaleconomist.com/wordpress/job-lock-introduction/

Also, Noah's link to the (October 2006) Great Risk Shift discussion at CT is like a fly frozen in amber moments before the meteor impact. I wonder, seven years and a few months on, what the authors might say now?

I'm not sure if we want kids to take more risks. They'll almost certainly fail if they try to do something like start a business or become an artist. Is there a non-sentimental argument for being something other than an overachiever who shoots straight for high-paying jobs with high job satisfaction and a well-defined path to success?

Maybe we could make the argument that risk-taking is good for society in general, but I don't think it's good for the individual risk-taker. And parents obviously put their individual children above the good of society, for better or worse.

Thanks for the posting! Get business loans without any difficulties from financial services company. Selective Financial Services is an international financial organization with Relationship Managers in major Financial World Markets.Backed by our Research Team, our clients benefits of geographic variety, superior market knowledge, and professional Consultation and advice in a wide range of Leveraged financial products